A derivative is a security deriving it’s value from a particular asset. Some of the most common forms of derivatives include swaps, options, forwards, and futures contracts. They fall into two different categories: over-the-counter (OTC) and exchange-traded derivatives. OTC derivatives are significantly more common than those traded on exchanges.

These are typically leveraged by businesses as a hedge against risk. Those traded on the exchange, such as stock options or futures, mitigate much of the risk involved in their OTC counterparts due to the standardization. Generally, a derivative is a leveraged instrument, meaning the risks and rewards involved are positively correlated.